by Trilogy Payment Solutions – Why Pay More For your Card Processing Than You Have To?
As a small business owner, you have been inundated with offers from credit card processing companies promising to save you money. If you’ve been in business for some time and switched processors, you might have realized that those low offers don’t always pan out.
The correct question to ask is not “What is your rate?”, but “What is your effective rate?”
The effective rate takes into account all of the possible card categories that a transaction may qualify for, plus other fees such as monthly statement fees, annual fees, batch fees, PCI fees and transaction fees. You can figure out your effective rate by using a simple formula.
Effective Rate = your monthly processing charges divided by your monthly processing volume.
For example: If you process $10,000 dollars a month in volume and your processing bill was $400, then your effective rate is $10,000 divided by $400, or 4.00%
We will be producing a series of articles with key strategies to lower your card processing costs. The following is a detailed explanation of the first key strategy; adopting interchange plus pricing.
Interchange Plus Pricing
This type of pricing used to be reserved for Fortune 500 companies. Not any more.
Banks are hesitant and sometimes outright refuse to give IC Plus Pricing to small businesses because the banks can’t maximize their profits. They’d rather sell you enhanced billback or 3 tier pricing, which is much more lucrative. But ISO (Independent Sales Organizations) can and do sell interchange plus pricing.
Why interchange plus?
This pricing method places each transaction in the appropriate card rate category and charges the corresponding rate.
Essentially, is it “cost plus” pricing…you pay the exact interchange rate for the card category being charged by Visa, MasterCard or Discover, plus a fixed processor fee. No other pricing method does this. (There are over 440 different Visa, MasterCard, and/Discover rate categories . For a listing of rates www.visa.com and www.mastercard.com).
By comparison, the most common pricing method, Three Tier, places each transaction according to the processors preferences. The processors then place most transactions in the Mid and Non Qualified tiers as opposed to the Qualified tier. Yet, these same processors will sell you on the Qualified Rate Tier. This is a classic bait and switch.
Costco, for example, will sell you on their 1.48% rate for qualified transactions…and yet they charge 2.91% and 3.75% for mid and non qualified transactions, which make up over 80% of the typical merchants bill. All mileage cards, gold cards, business cards, premium cards and cards that are not swiped are…you guessed it…classified as mid or non qualified!
Three tier pricing thus typically creates a profit margin spread for the processor of 1 ¼ % to 2.00%, depending on the card mix.
Interchange Plus pricing, on the other hand, is pretty simple. As aforementioned, it is really just a “cost plus” system, where the processor passes through their cost of goods from Visa, MasterCard and Discover and then charges a fixed fee.
There are 3 components that make up your rate.
Interchange + Visa/MasterCard/Discover Assessment Fee + Processor Rate
1) Interchange consists of the over 440 Rate Categories (which vary by card and transaction type). Rates vary widely (from 0.95% + $0.11 for debit cards to 3.25% + $0.11 for certain corporate cards). Interchange rate categories are the same for all processors, and as such represent the base “cost of goods” in this industry (along with the assessment fees).
2) Assessment feeis the rate Visa, MasterCard and Discover charge for each transaction. Currently this fee is 0.11% + $0.02. This fee does not vary by card or transaction types. Assessment fees, like interchange rates, do not vary by processor.
3) The Processor fee is the rate your processor charges. This is the only negotiable part of the interchange fee available to the merchant, as it represents the processors profit margin. This fee does not vary by card or transaction type.
For example, an interchange plus vendor who offers you “interchange plus ½ %” (or interchange plus 50 basis points) would be making a ½ cent for every dollar charged. The other rates and fees would be the costs of goods, which go back to the card company itself (Visa, MasterCard or Discover).
Thus, instead of making 1 ¼ % to 2% profit margin, interchange plus processors generally make ½% or less…with the resultant savings going back to the merchant.
Remember, the ¾ % to 1 ½ % in savings comes right off of your top line revenue. If you process $10,000 a month, it would save you $75 to $150 a month, which would drop straight to your bottom line!
Interchange plus pricing has shown to be the least expensive cost method for credit card pricing, which is why it is required by both cost consolidation and procurement firms. If you, as a small business person, do only one thing to reduce your overhead, moving to a processor with interchange plus pricing should be that thing.